Credit Suisse's 6 Takeaways from the Petco Heath & Wellness Co. Inc. (WOOF) Call
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Credit Suisse analyst Seth Sigman reiterated a Neutral rating and $28.00 price target on Petco Heath & Wellness Co. Inc. (NASDAQ: WOOF) but highlighted some interesting points from the conference call that imply improving results: accelerating comps, 90bps of Covid costs that will decline and online sales accelerating to 92% growth. The analyst's key points include:
1) Trends accelerated across the business in Q4, and momentum continued into Q1, successfully managing the difficult comparison against the pantry loading a year ago. Comps should accelerate short-term.
2) Strong customer growth (1mn in each of last couple of quarters), should support higher baseline growth for comps assuming high retention and recurring behavior. We also expect some recovery in services as we started see in 2H.
3) Gross margin was slightly below our estimate (-80 bps vs. our -70) with channel mix and some COVID headwinds offset by improvement in margin rate across the business. We continue to model this down in FY21, due to online and service mix.
4) But some offsets. COVID costs added ~$45mn in FY20, impacting EBIT margin by ~90 bps. This is expected to reverse to some extent in FY21, which would basically account for more than all of the ~10 bps of EBITDA margin expansion in guidance. There could be upside from other sources.
5) SG&A leverage offset GM; SG&A growth did accelerate in Q4, attributed to advertising and perhaps higher incentive comp, although partially offset by leveraging labor and other costs.
6) Lower interest expense and tax rate add ~$0.05 to 2021 EPS vs. expectations, slightly offset by higher share count.
Shares of Petco Heath & Wellness Co. Inc. closed at $23.00 yesterday.
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